Long-term investments tend to offer a bigger reward. The key to experiencing the larger benefits of this type of buy and hold investing strategy is having the patience to withstand the inevitable ups and downs of a volatile market.
Getting caught up in market swings can send too many inexperienced investors to the selling table. This can ruin your chances of larger gains and keep you from investing in stocks that can – and should – be kept for years.
What Are Buy and Hold Stocks?
Buy and hold stocks are long-term investments that you feel comfortable keeping for at least one year – but preferable for several. By holding stocks through a number of market cycles, you have a much better chance of walking away with bigger profits.
But, how do you know which stocks are good for long-term investing? The best strategy is to use a combination of fundamental and contrarian indicators to make your decisions.
The key tools in long-term trading are fundamental indicators. They are what tell you if a stock is currently undervalued or overvalued. Fundamental indicators include things like:
By comparing the company’s earnings and debt; cash flow; and potential growth, you can determine how healthy the company is at the moment and whether or not its potential for future growth is strong enough to warrant you holding onto your investment for several years – or even decades.
Unlike fundamental indicators, which help to prove a company’s strength, contrarian indicators are those that go against standard thinking. This means that you see potential in a stock you think is being overlooked at the time and are willing to take a chance investing in an up and coming company or industry.
Short ratios and pull-call ratios are all contrarian indicators that may make you take notice of a certain stock. Keep in mind, however, that using contrarian indicators does make your purchase riskier; although the benefits of a successful buy can be quite profitable when you hit the mark.
Buying and holding stocks for the long term takes a certain amount of faith, patience and the ability to see the big picture. Long-term investing is not for the weak or skittish, and it is certainly not for those out to make a quick profit. The ability to foresee into the future, and the calmness to stick it out when the market experiences unexpected lows, can all yield larger returns on investments. The bottom line is this: a solid buy and hold strategy can work in building future wealth, but often taxes the nerves of the less experienced investor and should only be considered when you are experienced and mature enough to handle the long-term nature of this kind of investment opportunity.